Intermediate
Accounting
6-1
Prepared by
Coby Harmon
University of California, Santa Barbara
6
Accounting and the Time
Value of Money
Intermediate Accounting
14th Edition
Kieso, Weygandt, and Warfield
6-2
Learning Objectives
6-3
1.
Identify accounting topics where the time value of money is relevant.
2.
Distinguish between simple and compound interest.
3.
Use appropriate compound interest tables.
4.
Identify variables fundamental to solving interest problems.
5.
Solve future and present value of 1 problems.
6.
Solve future value of ordinary and annuity due problems.
7.
Solve present value of ordinary and annuity due problems.
8.
Solve present value problems related to deferred annuities and
bonds.
9.
Apply expected cash flows to present value measurement.
Accounting and the Time Value of Money
Basic Time
Value
Concepts
Applications
The nature of
interest
Simple interest
Compound
interest
Fundamental
variables
6-4
Single-Sum
Problems
Future value
of a single
sum
Present value
of a single
sum
Solving for
other
unknowns
More
Complex
Situations
Present
Value
Measurement
Future value
of ordinary
annuity
Future value
of annuity due
Deferred
annuities
Valuation of
long-term
bonds
Examples of
FV of annuity
Present value
of ordinary
annuity
Effectiveinterest
method of
bond discount/
premium
amortization
Choosing an
appropriate
interest rate
Example of
expected cash
flow
Annuities
Present value
of annuity due
Examples of
PV of annuity
Basic Time Value Concepts
Time Value of Money

A relationship between time and money.

A dollar received today is worth more than a dollar
promised at some time in the future.
6-5
LO 1 Identify accounting topics where the time value of money is relevant.
Basic Time Value Concepts
Applications to Time Value Concepts:
1. Notes
2. Leases
3. Pensions and Other
Postretirement
Benefits
5. Shared-Based
Compensation
6. Business Combinations
7. Disclosures
8. Environmental Liabilities
4. Long-Term Assets
6-6
LO 1 Identify accounting topics where the time value of money is relevant.
Basic Time Value Concepts
The Nature of Interest
6-7

Payment for the use of money.

Excess cash received or repaid over the amount
borrowed (principal).
LO 1 Identify accounting topics where the time value of money is relevant.
Basic Time Value Concepts
Simple Interest

Interest computed on the principal only.
Illustration: Barstow Electric Inc. borrows $10,000 for 3 years
at a rate of 8% per year. Compute the total interest to be paid
for the 1 year.
Interest = p x i x n
Annual
Interest
= $10,000 x .08 x 1
= $800
Federal law requires the disclosure of interest rates on an annual basis.
6-8
LO 2 Distinguish between simple and compound interest.
Basic Time Value Concepts
Simple Interest

Interest computed on the principal only.
Illustration: Barstow Electric Inc. borrows $10,000 for 3 years
at a rate of 8% per year. Compute the total interest to be paid
for the 3 years.
Interest = p x i x n
Total
Interest
= $10,000 x .08 x 3
= $2,400
Federal law requires the disclosure of interest rates on an annual basis.
6-9
LO 2 Distinguish between simple and compound interest.
Basic Time Value Concepts
Simple Interest

Interest computed on the principal only.
Illustration: On October 1, 2012, Barstow Electric Inc.
borrows $10,000 for 3 months at a rate of 7% per year.
Compute the total interest to be paid for the year ended Dec.
31, 2012.
Interest = p x i x n
Partial
Year
6-10
= $10,000 x .08 x 3/12
= $200
LO 2 Distinguish between simple and compound interest.
Basic Time Value Concepts
Compound Interest


6-11
Computes interest on
►
principal and
►
interest earned that has not been paid or
withdrawn.
Most business situations use compound interest.
LO 2 Distinguish between simple and compound interest.
Basic Time Value Concepts
Illustration: Tomalczyk Company deposits $10,000 in the Last National
Bank, where it will earn simple interest of 9% per year. It deposits another
$10,000 in the First State Bank, where it will earn compound interest of
9% per year compounded annually. In both cases, Tomalczyk will not
withdraw any interest until 3 years from the date of deposit.
Illustration 6-1
Simple vs. Compound Interest
6-12
Year 1 $10,000.00 x 9%
$ 900.00 $ 10,900.00
Year 2 $10,900.00 x 9%
$ 981.00 $ 11,881.00
Year 3 $11,881.00 x 9%
$1,069.29 $ 12,950.29
LO 2 Distinguish between simple and compound interest.
Basic Time Value Concepts
Compound Interest Tables
Table 1 - Future Value of 1
Table 2 - Present Value of 1
Table 3 - Future Value of an Ordinary Annuity of 1
Table 4 - Present Value of an Ordinary Annuity of 1
Table 5 - Present Value of an Annuity Due of 1
Number of Periods = number of years x the number of
compounding periods per year.
Compounding Period Interest Rate = annual rate divided by the
number of compounding periods per year.
6-13
LO 3 Use appropriate compound interest tables.
Basic Time Value Concepts
Compound Interest
Illustration 6-2
Excerpt from Table 6-1
How much principal plus interest a dollar accumulates to at the end of
each of five periods, at three different rates of compound interest.
6-14
LO 3 Use appropriate compound interest tables.
Basic Time Value Concepts
Compound Interest
Formula to determine the future value factor (FVF) for 1:
Where:
FVF n,i
6-15
= future value factor for n periods at i interest
n
= number of periods
i
= rate of interest for a single period
LO 3 Use appropriate compound interest tables.
Basic Time Value Concepts
Compound Interest
Determine the number of periods by multiplying the number
of years involved by the number of compounding periods
per year.
Illustration 6-4
Frequency of Compounding
6-16
LO 3 Use appropriate compound interest tables.
Basic Time Value Concepts
Compound Interest
9% annual interest compounded daily provides a 9.42%
yield.
Effective Yield for a $10,000 investment.
6-17
Illustration 6-5
Comparison of Different
Compounding Periods
LO 3 Use appropriate compound interest tables.
Basic Time Value Concepts
Fundamental Variables

Rate of Interest

Number of Time Periods

Future Value

Present Value
Illustration 6-6
6-18
LO 4 Identify variables fundamental to solving interest problems.
Single-Sum Problems
Two Categories
Unknown Present Value
Unknown Future Value
Illustration 6-6
6-19
LO 5 Solve future and present value of 1 problems.
Single-Sum Problems
Future Value of a Single Sum
Value at a future date of a given amount invested, assuming
compound interest.
Where:
FV = future value
PV = present value (principal or single sum)
FVF n,i = future value factor for n periods at i interest
6-20
LO 5 Solve future and present value of 1 problems.
Future Value of a Single Sum
Illustration: Bruegger Co. wants to determine the future
value of $50,000 invested for 5 years compounded annually at
an interest rate of 11%.
= $84,253
Illustration 6-7
6-21
LO 5 Solve future and present value of 1 problems.
Future Value of a Single Sum
Alternate
Calculation
Illustration: Bruegger Co. wants to determine the future
value of $50,000 invested for 5 years compounded annually at
an interest rate of 11%.
What table
do we use?
Illustration 6-7
6-22
LO 5 Solve future and present value of 1 problems.
Alternate
Calculation
Future Value of a Single Sum
i=11%
n=5
What factor do we use?
$50,000
Present Value
6-23
x
1.68506
Factor
=
$84,253
Future Value
LO 5 Solve future and present value of 1 problems.
Future Value of a Single Sum
BE6-1: Bob Anderson invested $15,000 today in a fund that
earns 8% compounded annually. To what amount will the
investment grow in 3 years?
Present Value
$15,000
0
1
Future Value?
2
3
4
5
6
What table do we use?
6-24
LO 5 Solve future and present value of 1 problems.
Future Value of a Single Sum
i=8%
n=3
$15,000
Present Value
6-25
x
1.25971
Factor
=
$18,896
Future Value
LO 5 Solve future and present value of 1 problems.
Future Value of a Single Sum
PROOF
Year
1
2
3
Beginning
Balance
Rate
$ 15,000 x 8%
16,200 x 8%
17,496 x 8%
Previous
Year-End
Interest
Balance
Balance
=
1,200 +
15,000 = $ 16,200
=
1,296 +
16,200 =
17,496
=
1,400 +
17,496 =
18,896
BE6-1: Bob Anderson invested $15,000 today in a fund that
earns 8% compounded annually. To what amount will the
investment grow in 3 years?
6-26
LO 5 Solve future and present value of 1 problems.
Future Value of a Single Sum
Present Value $15,000
0
1
2
Future Value?
3
4
5
6
BE6-1: Bob Anderson invested $15,000 today in a fund that
earns 8% compounded semiannually. To what amount will the
investment grow in 3 years?
What table do we use?
6-27
LO 5 Solve future and present value of 1 problems.
Future Value of a Single Sum
i=4%
n=6
What factor?
$15,000
Present Value
6-28
x 1.26532
Factor
=
$18,980
Future Value
LO 5 Solve future and present value of 1 problems.
Single-Sum Problems
Present Value of a Single Sum
Value now of a given amount to be paid or received in
the future, assuming compound interest.
Where:
FV = future value
PV = present value (principal or single sum)
PVF n,i = present value factor for n periods at i interest
6-29
LO 5 Solve future and present value of 1 problems.
Present Value of a Single Sum
Illustration: What is the present value of $84,253 to be
received or paid in 5 years discounted at 11% compounded
annually?
= $50,000
Illustration 6-11
6-30
LO 5 Solve future and present value of 1 problems.
Present Value of a Single
Alternate
Sum
Calculation
Illustration: What is the present value of $84,253 to be
received or paid in 5 years discounted at 11% compounded
annually?
What table
do we use?
Illustration 6-11
6-31
LO 5 Solve future and present value of 1 problems.
Present Value of a Single Sum
i=11%
n=5
What factor?
$84,253
Future Value
6-32
x
.59345
Factor
=
$50,000
Present Value
LO 5 Solve future and present value of 1 problems.
Present Value of a Single Sum
BE6-2: Caroline and Clifford need $25,000 in 4 years.
What amount must they invest today if their investment
earns 12% compounded annually?
Future Value
$25,000
Present Value?
0
1
2
3
4
5
6
What table do we use?
6-33
LO 5 Solve future and present value of 1 problems.
Present Value of a Single Sum
i=12%
n=4
What factor?
$25,000
Future Value
6-34
x
.63552
Factor
=
$15,888
Present Value
LO 5 Solve future and present value of 1 problems.
Present Value of a Single Sum
BE6-2: Caroline and Clifford need $25,000 in 4 years.
What amount must they invest today if their investment
earns 12% compounded quarterly?
Future Value
$25,000
Present Value?
0
1
2
3
4
5
6
What table do we use?
6-35
LO 5 Solve future and present value of 1 problems.
Present Value of a Single Sum
i=3%
n=16
$25,000
Future Value
6-36
x
.62317
Factor
=
$15,579
Present Value
LO 5 Solve future and present value of 1 problems.
Single-Sum Problems
Solving for Other Unknowns
Example—Computation of the Number of Periods
The Village of Somonauk wants to accumulate $70,000 for the
construction of a veterans monument in the town square. At the
beginning of the current year, the Village deposited $47,811 in a
memorial fund that earns 10% interest compounded annually.
How many years will it take to accumulate $70,000 in the
memorial fund?
Illustration 6-13
6-37
LO 5 Solve future and present value of 1 problems.
Single-Sum Problems
Example—Computation of the Number of Periods
Illustration 6-14
Using the future value factor of
1.46410, refer to Table 6-1 and read
down the 10% column to find that
factor in the 4-period row.
6-38
LO 5 Solve future and present value of 1 problems.
Single-Sum Problems
Example—Computation of the Number of Periods
Illustration 6-14
Using the present value factor of
.68301, refer to Table 6-2 and read
down the 10% column to find that
factor in the 4-period row.
6-39
LO 5 Solve future and present value of 1 problems.
Single-Sum Problems
Solving for Other Unknowns
Example—Computation of the Number of Periods
The Village of Somonauk wants to accumulate $70,000 for the
construction of a veterans monument in the town square. At the
beginning of the current year, the Village deposited $47,811 in a
memorial fund that earns 10% interest compounded annually.
How many years will it take to accumulate $70,000 in the
memorial fund?
Illustration 6-13
6-40
LO 5 Solve future and present value of 1 problems.
Single-Sum Problems
Solving for Other Unknowns
Example—Computation of the Interest Rate
Advanced Design, Inc. needs $1,409,870 for basic research 5
years from now. The company currently has $800,000 to invest
for that purpose. At what rate of interest must it invest the
$800,000 to fund basic research projects of €1,409,870, 5 years
from now?
Illustration 6-15
6-41
LO 5 Solve future and present value of 1 problems.
Single-Sum Problems
Example—Computation of the Interest Rate
Illustration 6-16
Using the future value factor of
1.76234, refer to Table 6-1 and
read across the 5-period row to
find the factor.
6-42
LO 5 Solve future and present value of 1 problems.
Single-Sum Problems
Example—Computation of the Interest Rate
Illustration 6-16
Using the present value factor of
.56743, refer to Table 6-2 and
read across the 5-period row to
find the factor.
6-43
LO 5 Solve future and present value of 1 problems.
Annuities
Annuity requires:
(1) Periodic payments or receipts (called rents) of the
same amount,
(2) Same-length interval between such rents, and
(3) Compounding of interest once each interval.
Two
Types
6-44
Ordinary Annuity - rents occur at the end of each period.
Annuity Due - rents occur at the beginning of each period.
LO 6 Solve future value of ordinary and annuity due problems.
Annuities
Future Value of an Ordinary Annuity

Rents occur at the end of each period.

No interest during 1st period.
Future Value
Present Value
0
6-45
$20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
1
2
3
4
5
6
7
8
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Ordinary Annuity
Illustration: Assume that $1 is deposited at the end of each
of 5 years (an ordinary annuity) and earns 12% interest
compounded annually. Following is the computation of the
future value, using the “future value of 1” table (Table 6-1) for
each of the five $1 rents.
Illustration 6-17
6-46
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Ordinary Annuity
A formula provides a more efficient way of expressing the
future value of an ordinary annuity of 1.
Where:
R =
periodic rent
FVF-OA n,i = future value factor of an ordinary annuity
i =
rate of interest per period
n=
6-47
number of compounding periods
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Ordinary Annuity
Illustration: What is the future value of five $5,000 deposits
made at the end of each of the next 5 years, earning interest
of 12%?
= $31,764.25
Illustration 6-19
6-48
LO 6 Solve future value of ordinary and annuity due problems.
Alternate
Future Value of an Ordinary AnnuityCalculation
Illustration: What is the future value of five $5,000 deposits
made at the end of each of the next 5 years, earning interest
of 12%?
What table
do we use?
Illustration 6-19
6-49
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Ordinary Annuity
i=12%
n=5
What factor?
$5,000
Deposits
6-50
x
6.35285
Factor
=
$31,764
Present Value
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Ordinary Annuity
Future Value
Present Value
0
$30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
1
2
3
4
5
6
7
8
BE6-13: Gomez Inc. will deposit $30,000 in a 12% fund at the
end of each year for 8 years beginning December 31, 2012.
What amount will be in the fund immediately after the last
deposit?
What table do we use?
6-51
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Ordinary Annuity
i=12%
n=8
$30,000
Deposit
6-52
x
12.29969
Factor
=
$368,991
Future Value
LO 6 Solve future value of ordinary and annuity due problems.
Annuities
Future Value of an Annuity Due

Rents occur at the beginning of each period.

Interest will accumulate during 1st period.

Annuity Due has one more interest period than Ordinary
Annuity.

Factor = multiply future value of an ordinary annuity factor
by 1 plus the interest rate.
Future Value
$20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
0
1
2
3
4
5
6
7
6-53
8
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Annuity Due
Comparison of Ordinary Annuity with an Annuity Due
Illustration 6-21
6-54
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Annuity Due
Computation of Rent
Illustration: Assume that you plan to accumulate $14,000 for a
down payment on a condominium apartment 5 years from now. For
the next 5 years, you earn an annual return of 8% compounded
semiannually. How much should you deposit at the end of each 6month period?
R = $1,166.07
Illustration 6-24
6-55
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Annuity Due
Alternate
Calculation
Illustration 6-24
Computation of Rent
$14,000
= $1,166.07
12.00611
6-56
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Annuity Due
Computation of Number of Periodic Rents
Illustration: Suppose that a company’s goal is to accumulate
$117,332 by making periodic deposits of $20,000 at the end of each
year, which will earn 8% compounded annually while accumulating.
How many deposits must it make?
Illustration 6-25
6-57
5.86660
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Annuity Due
Computation of Future Value
Illustration: Mr. Goodwrench deposits $2,500 today in a savings
account that earns 9% interest. He plans to deposit $2,500 every
year for a total of 30 years. How much cash will Mr. Goodwrench
accumulate in his retirement savings account, when he retires in 30
years?
Illustration 6-27
6-58
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Annuity Due
Present Value
Future Value
20,000
$20,000
20,000
20,000
20,000
20,000
20,000
20,000
0
1
2
3
4
5
6
7
8
Illustration: Bayou Inc. will deposit $20,000 in a 12% fund at
the beginning of each year for 8 years beginning January 1,
Year 1. What amount will be in the fund at the end of Year 8?
What table do we use?
6-59
LO 6 Solve future value of ordinary and annuity due problems.
Future Value of an Annuity Due
i=12%
n=8
12.29969
$20,000
Deposit
6-60
x
x
1.12
13.775652
Factor
=
13.775652
=
$275,513
Future Value
LO 6 Solve future value of ordinary and annuity due problems.
Annuities
Present Value of an Ordinary Annuity

Present value of a series of equal amounts to be
withdrawn or received at equal intervals.

Periodic rents occur at the end of the period.
Present Value
$100,000
100,000
100,000
100,000
100,000
100,000
19
20
.....
0
6-61
1
2
3
4
LO 7 Solve present value of ordinary and annuity due problems.
Present Value of an Ordinary Annuity
Illustration: Assume that $1 is to be received at the end of
each of 5 periods, as separate amounts, and earns 12%
interest compounded annually.
Illustration 6-28
6-62
LO 7 Solve present value of ordinary and annuity due problems.
Present Value of an Ordinary Annuity
A formula provides a more efficient way of expressing the
present value of an ordinary annuity of 1.
Where:
6-63
LO 7 Solve present value of ordinary and annuity due problems.
Present Value of an Ordinary Annuity
Illustration: What is the present value of rental receipts of
$6,000 each, to be received at the end of each of the next 5
years when discounted at 12%?
Illustration 6-30
6-64
LO 7 Solve present value of ordinary and annuity due problems.
Present Value of an Ordinary Annuity
Present Value
$100,000
100,000
100,000
100,000
100,000
100,000
19
20
.....
0
1
2
3
4
Illustration: Jaime Yuen wins $2,000,000 in the state lottery.
She will be paid $100,000 at the end of each year for the next
20 years. How much has she actually won? Assume an
appropriate interest rate of 8%.
What table do we use?
6-65
LO 7 Solve present value of ordinary and annuity due problems.
Present Value of an Ordinary Annuity
i=5%
n=20
$100,000
Receipts
6-66
x
9.81815
Factor
=
$981,815
Present Value
LO 7 Solve present value of ordinary and annuity due problems.
Annuities
Present Value of an Annuity Due

Present value of a series of equal amounts to be
withdrawn or received at equal intervals.

Periodic rents occur at the beginning of the period.
Present Value
$100,000
100,000
100,000
100,000
100,000
100,000
.....
0
6-67
1
2
3
4
19
20
LO 7 Solve present value of ordinary and annuity due problems.
Present Value of an Annuity Due
Comparison of Ordinary Annuity with an Annuity Due
Illustration 6-31
6-68
LO 7 Solve present value of ordinary and annuity due problems.
Present Value of an Annuity Due
Illustration: Space Odyssey, Inc., rents a communications
satellite for 4 years with annual rental payments of $4.8 million
to be made at the beginning of each year. If the relevant
annual interest rate is 11%, what is the present value of the
rental obligations?
Illustration 6-33
6-69
LO 7 Solve present value of ordinary and annuity due problems.
Present Value of an Annuity Due
Present Value
$100,000
100,000
100,000
100,000
100,000
100,000
.....
0
1
2
3
4
19
20
Illustration: Jaime Yuen wins $2,000,000 in the state lottery.
She will be paid $100,000 at the beginning of each year for the
next 20 years. How much has she actually won? Assume an
appropriate interest rate of 8%.
What table do we use?
6-70
LO 7 Solve present value of ordinary and annuity due problems.
Present Value of an Annuity Due
i=8%
n=20
$100,000
Receipts
6-71
x
10.60360
Factor
=
$1,060,360
Present Value
LO 7 Solve present value of ordinary and annuity due problems.
Present Value of an Annuity Due
Computation of the Interest Rate
Illustration: Assume you receive a statement from MasterCard with
a balance due of $528.77. You may pay it off in 12 equal monthly
payments of $50 each, with the first payment due one month from
now. What rate of interest would you be paying?
Referring to Table 6-4 and reading across the 12-period row, you find 10.57534 in
the 2% column. Since 2% is a monthly rate, the nominal annual rate of interest is
24% (12 x 2%). The effective annual rate is 26.82413% [(1 + .02)12 - 1].
6-72
LO 7 Solve present value of ordinary and annuity due problems.
More Complex Situations
Deferred Annuities

Rents begin after a specified number of periods.

Future Value - Calculation same as the future value of
an annuity not deferred.

Present Value - Must recognize the interest that accrues
during the deferral period.
Future Value
Present Value
100,000
100,000
100,000
.....
0
6-73
1
2
3
4
19
20
LO 8 Solve present value problems related to deferred annuities and bonds.
More Complex Situations
Valuation of Long-Term Bonds
Two Cash Flows:

Periodic interest payments (annuity).

Principal paid at maturity (single-sum).
2,000,000
$140,000
140,000
140,000
140,000
140,000
140,000
9
10
.....
0
6-74
1
2
3
4
LO 8 Solve present value problems related to deferred annuities and bonds.
Valuation of Long-Term Bonds
Present Value
$140,000
140,000
140,000
140,000
140,000
2,140,000
.....
0
1
2
3
4
9
10
BE6-15: Clancey Inc. issues $2,000,000 of 7% bonds due in 10
years with interest payable at year-end. The current market rate
of interest for bonds of similar risk is 8%. What amount will
Clancey receive when it issues the bonds?
6-75
LO 8 Solve present value problems related to deferred annuities and bonds.
i=8%
n=10
Valuation of Long-Term Bonds
PV of Interest
$140,000
x
Interest Payment
6-76
6.71008
Factor
=
$939,411
Present Value
LO 8 Solve present value problems related to deferred annuities and bonds.
i=8%
n=10
Valuation of Long-Term Bonds
PV of Principal
$2,000,000
Principal
6-77
x
.46319
Factor
=
$926,380
Present Value
LO 8 Solve present value problems related to deferred annuities and bonds.
Valuation of Long-Term Bonds
BE6-15: Clancey Inc. issues $2,000,000 of 7% bonds due in 10
years with interest payable at year-end.
Present value of Interest
$939,411
Present value of Principal
926,380
Bond current market value
Date Account Title
Cash
Bonds payable
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$1,865,791
Debit
Credit
1,865,791
1,865,791
LO 8 Solve present value problems related to deferred annuities and bonds.
Valuation of Long-Term Bonds
BE6-15:
Schedule of Bond Discount Amortization
10-Year, 7% Bonds Sold to Yield 8%
Cash
Interest
Paid
Date
1/1/10
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
140,000
140,000
140,000
140,000
140,000
140,000
140,000
140,000
140,000
140,000
*
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Interest
Expense
Bond
Discount
Amortization
149,263
150,004
150,805
151,669
152,603
153,611
154,700
155,876
157,146
158,533 *
9,263
10,004
10,805
11,669
12,603
13,611
14,700
15,876
17,146
18,533
Carrying
Value
of Bonds
1,865,791
1,875,054
1,885,059
1,895,863
1,907,532
1,920,135
1,933,746
1,948,445
1,964,321
1,981,467
2,000,000
rounding
LO 8 Solve present value problems related to deferred annuities and bonds.
Present Value Measurement
Concept Statement No. 7 introduces an expected cash
flow approach that uses a range of cash flows and
incorporates the probabilities of those cash flows.
Choosing an Appropriate Interest Rate
Three Components of Interest:
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
Pure Rate

Expected Inflation Rate

Credit Risk Rate
Risk-free rate of
return. IASB states a
company should
discount expected
cash flows by the riskfree rate of return.
LO 9 Apply expected cash flows to present value measurement.
Present Value Measurement
E6-21: Keith Bowie is trying to determine the amount to set aside so that
she will have enough money on hand in 2 years to overhaul the engine
on her vintage used car. While there is some uncertainty about the cost
of engine overhauls in 2 years, by conducting some research online,
Angela has developed the following estimates.
Instructions: How much should Keith Bowie deposit today in an
account earning 6%, compounded annually, so that she will have enough
money on hand in 2 years to pay for the overhaul?
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LO 9 Apply expected cash flows to present value measurement.
Present Value Measurement
Instructions: How much should Keith Bowie deposit today in an
account earning 6%, compounded annually, so that she will have enough
money on hand in 2 years to pay for the overhaul?
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LO 9 Apply expected cash flows to present value measurement.
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